China started cooking up fresh challenges to the US dollar’s role in international trade in recent days, but the signs are it’s unlikely to make much headway.
Russia is ready to develop a new global reserve currency alongside China and other BRICS nations, in a potential challenge to the dominance of the US dollar.
President Vladimir Putin signaled the new reserve currency would be based on a basket of currencies from the group’s members: Brazil, Russia, India, China, and South Africa.
“The matter of creating the international reserve currency based on the basket of currencies of our countries is under review,” Putin told the BRICS Business Forum on Wednesday, according to a TASS report. “We are ready to openly work with all fair partners.”
The dollar has long been seen as the world’s reserve currency, but its dominance in share of international currency reserves is waning. Central banks are looking to diversify their holdings into currencies like the yuan, as well as into non-traditional areas like the the Swedish krona and the South Korean won, according to the International Monetary Fund.
“This is a move to address the perceived US-hegemony of the IMF,” ING’s global head of markets Chris Turner said in a note. “It will allow BRICS to build their own sphere of influence and unit of currency within that sphere.”
Russia’s move comes after Western sanctions imposed over the Ukraine war all but cut the country out of the global financial system, curtailing access to its dollars and putting pressure on its economy.
“The speed with which western nations and its allies sanctioned Russian FX reserves (freezing around half) no doubt shocked Russian authorities,” ING’s Turner said.
“The Central Bank of Russia effectively admitted as much, and no doubt some BRICS nations — especially China — took notice of the speed and stealth at which the US Treasury moved,” he added.
Those sanctions have likely encouraged Moscow and Beijing to work on an alternative to the IMF’s international reserve asset, the special drawing rights, Turner suggested.
While it’s not a reserve currency, the SDR is based on a basket of currencies made up of the US dollar, the euro, the British pound and Japan’s yen — as well as China’s yuan.
One possibility is that the BRICS basket currency could attract the reserves not just of the group’s members, but also countries already in their range of influence, he suggested. These include nations in South Asia and the Middle East.
Russia has seen its currency the ruble rebound to above its pre-war level, thanks to central bank support, after it plunged 70% in less than two weeks after the Ukraine invasion. It has risen 15.2% in June to 1.87 cents. Meanwhile, the yuan has held steady at around $0.15 over the same period.
The BRICS countries — Brazil, Russia, India, China, and South Africa — plan to develop a new global reserve currency based on a basket of their currencies, President Vladimir Putin said. Meanwhile, China said it will build a fresh yuan reserve alongside Hong Kong, Singapore and three other states, with each contributing around $2.2 billion.
Beijing likely hopes that these moves will threaten the dollar’s position as the world’s reserve currency, used in contracts to oil international trade. But the greenback has seen off such challenges before.
In 2016, the yuan joined the basket of currencies that make up the International Monetary Fund’s international reserve asset, the special drawing rights.
“That was meant to be the gun being fired on the yuan becoming a major international reserve,” ING’s global head of markets, Chris Turner, told Insider. “But the pick-up in yuan’s use as a reserve currency has been quite disappointing.”
Only one-quarter of the shift away from dollars has been into the renminbi in recent years, according to the IMF.
Central banks have instead pivoted to holding non-traditional reserve currencies like the Australian dollar, Swedish krona, and South Korean won, and the yuan still accounts for just 2.9% of global reserves.
The yuan is also pegged the dollar via a reference rate, with the Chinese central bank maintaining a broadly seven-to-one ratio to make China’s exports more competitive. That means it’s unlikely to threaten its American counterpart as a global reserve asset.
“The BRICS reserve currency will be a challenging plan,” Oanda senior market analyst Jeff Halley told Insider. “Four out of the five currencies are managed currencies, and in China’s case, the yuan is not convertible and is managed against a basket of currencies, of which the US dollar has the largest weighting.”
In addition, there’s the question of conversion — that is, whether there are restrictions on how a currency is traded on the foreign exchange market. Those who want to trade high amounts of India’s rupee, for instance, must get approval first.
So while investors might be concerned about this apparent fresh threat to dollar dominance, these factors suggest the greenback won’t face losing its pole position any time soon.
“I hear this story all the time,” Halley said. “There is no threat in the foreseeable future to the dominance of the US dollar. It is the currency of the largest economy, used in the largest and deepest capital markets in the world, and is freely convertible.”